Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening, and now onto today's show.
Speaker: The following podcast was recorded on the 25th of May 2023 by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Speaker: To our regular listeners, please note that the name of this podcast is changing to the Macro Brief from the 1st of June 2023.
Speaker: You'll find us in the usual places by searching for the Macro Brief.
Speaker: And now, on to the podcast.
Speaker: Hello, I'm Piers Butler in London.
Speaker: And I'm Aline Van Dyne in New York.
Speaker: Here's what's coming up this week.
Speaker: We find out why the ECB and the Bank of England's tightening cycles could be far from over.
Speaker: With time running out, we ask whether the US is any closer to reaching an agreement on its debt limit.
Speaker: And we examine whether China's gradual economic recovery could gather momentum through the rest of this year.
Speaker: We begin in Europe, where both the ECB and the Bank of England have been on aggressive tightening cycles for over a year now.
Speaker: But as Simon Wells, chief European economist, can explain, the rate hikes may not be over just yet.
Speaker: Simon, welcome to the podcast.
Speaker: Hi.
Speaker: So, Simon, let's talk about inflation, because here we were thinking that maybe it was going to sort of start tailing off.
Speaker: And we've had some recent data that seems to be pointing in the opposite direction.
Speaker: Yes, that's right.
Speaker: Core inflation particularly has been stubborn as service price inflation has started to really pick up even as energy price inflation has come down.
Speaker: So a week or so ago, we revised up a little bit our forecast for eurozone inflation.
Speaker: And then this week, we had that enormous UK inflation print, where yes, inflation fell.
Speaker: It fell from 10.1 to 8.7.
Speaker: But that was a lot less than the market and Bank of England expected.
Speaker: It was that core rate again that was very strong.
Speaker: It went from 6.2 to 6.8, the highest reading since March 1992.
Speaker: Very unexpected.
Speaker: And with the Bank of England saying it is data dependent, it probably has to react.
Speaker: So on the back of that, you've revised your outlook for what both the ECB and the Bank of England are likely to do.
Speaker: Tell us about the ECB first.
Speaker: That's right.
Speaker: I mean, the ECB change happened before the UK data, but a lot of the issues are similar.
Speaker: As I said, we've revised up our own inflation forecast.
Speaker: Some of the leading indicators this week showed a bit of a moderation in the economy, but still a very buoyant service sector.
Speaker: The labour market remains quite tight and firms' costs, their labour costs in particular, continue to rise.
Speaker: With ECB policymakers saying they want to see sustained falls in core inflation before they ease off, we don't think that's going to happen until the fourth quarter of this year.
Speaker: The result is they're going to carry on hiking for longer.
Speaker: So we've added two 25 basis point rate hikes for the ECB for July and for September.
Speaker: That would take the key deposit rate to 4%.
Speaker: We think the ECB are going to go on a summer hike.
Speaker: And so for the Bank of England?
Speaker: Well, it's quite similar, actually.
Speaker: We've added two more 25 basis point rate rises there.
Speaker: So on top of the one we already expected in June, we've added them for August and September.
Speaker: That would take the Bank of England policy rate to five and a quarter percent.
Speaker: So still quite a bit of tightening there.
Speaker: But it's on the back of this inflation data, a labour market in the UK where wage growth really isn't falling back.
Speaker: And a Bank of England, as I said, that says it's data dependent and is likely to do something.
Speaker: So in terms of market expectations, it looks like the market is still expecting cuts.
Speaker: So is there a danger that the central banks overreact?
Speaker: There's always that danger.
Speaker: Credit conditions are tightening.
Speaker: The income squeeze is still happening.
Speaker: And monetary policy works with famously long and variable lags.
Speaker: So
Speaker: it's quite right that the central banks might want to stop and assess what they've done so far.
Speaker: So yes, there are those risks.
Speaker: But on the other hand, unlike the market, we're not expecting cuts.
Speaker: I think we still think some of these core inflationary pressures could persist.
Speaker: And that means once rates reach their peak, they may have to stay there for longer than the market is currently anticipating.
Speaker: Simon, thanks for joining us.
Speaker: Thank you.
Speaker: Now, Eileen, on last week's podcast, we took a look at the negotiations around the US debt ceiling.
Speaker: Have there been any developments?
Speaker: Well, Piers, talks are still ongoing.
Speaker: Just to remind listeners, the US is approaching the limit of how much debt it can accumulate and could run out of cash and even default if no agreement is reached by June.
Speaker: Ryan Wang, US economist, can give us the latest.
Speaker: So Ryan, we heard this week confirmation that June 1st is the key date.
Speaker: Just talk us through the significance of that.
Speaker: Eileen, that's right.
Speaker: The Treasury reiterated that the first of June could be the first potential date when it would exhaust both its cash balance and its borrowing authority.
Speaker: That's because the Treasury has been operating under the debt limit since January.
Speaker: And we can see that its cash balance has varied over the past week somewhere between 60 billion and 80 billion dollars.
Speaker: We know that in the absence of debt limit constraints, the Treasury would probably be holding a cash balance of over 500 billion dollars.
Speaker: That would be important for operational resilience.
Speaker: And so that cash balance is a sign that the debt limit is already a limiting
Speaker: the Treasury's maneuvering room with respect to debt management.
Speaker: So Ryan, talks are ongoing.
Speaker: What are some of the main issues that are still being discussed?
Speaker: Because compromise presumably is still possible.
Speaker: Well, one key issue with respect to the negotiations between the White House and House Republicans relates to discretionary spending levels for the upcoming fiscal year.
Speaker: This type of spending
Speaker: is not the whole of government spending.
Speaker: In fact, discretionary spending is likely to total around 6.5% of GDP this year, and that is smaller than so-called mandatory spending, which includes major items such as Social Security, Medicare, and Medicaid.
Speaker: And this year is on track for about 15% of GDP in terms of outlays.
Speaker: So
Speaker: The gap and the discussion seems to be about whether to hold discretionary spending levels unchanged for the upcoming fiscal year or whether to have a reduction in the amount of funding provided for both defense and non-defense activities.
Speaker: If there is no compromise, if there's no solution, and the US were to stop payments, essentially default after the 1st of June, what does that mean?
Speaker: We haven't actually been there before, even though debt negotiations have been fraught many times before.
Speaker: Right.
Speaker: I think the main thing that we can count on would be a marked increase in uncertainty.
Speaker: As we move into the month of June, not just June 1st, but also the period that immediately follows it, that will be the period of time where there's the greatest potential for the Treasury to be unable to meet some of its obligations.
Speaker: We already know, for example, that major payments are scheduled to be made on June the 1st and June the 2nd.
Speaker: and herein lies the problem.
Speaker: So the maneuvering room that I was talking about is already getting lower and lower, and it will simply shrink even further in early June, creating the risk of unforeseen circumstances and consequences for both markets and the broader economy.
Speaker: And what about the Fed?
Speaker: Are they saying anything, any implications from your perspective?
Speaker: Well, I think from the perspective of FOMC policymakers, the current debt limit impasse is simply another downside risk that must be considered.
Speaker: And there's other downside risks that are also very relevant.
Speaker: Of course, the banking sector developments since March and the potential impact that those developments could have on credit conditions, lending standards to businesses and households.
Speaker: These are all downside risks that the FOMC is contemplating.
Speaker: But those risks need to be balanced against
Speaker: what is happening on the inflation side.
Speaker: Core inflation remains very elevated and really hasn't shown much significant progress in terms of declining in recent months.
Speaker: So it's really this assessment of high inflation against these current risks that is really driving the FOMC's decisions about what to do at the upcoming June policy meeting and beyond.
Speaker: Now, if there was a resolution to the debt limit impasse, that would be relevant because it would remove one of those downside risks that the Fed is concerned about.
Speaker: Ryan, thanks so much for the detailed update.
Speaker: Thanks a lot, Aline.
Speaker: Last week, HSBC hosted our first in-person China conference since 2019.
Speaker: We welcomed over 1,200 participants, including investors, corporates, policymakers and fellow analysts, over two days in Shenzhen.
Speaker: Jing Liu is chief economist for Greater China, and she spoke to Graham Mackay earlier.
Speaker: Graham started by asking Jing what the general mood is around China's economic recovery.
Speaker: Well, I think the overarching message we got from clients in particular is China's recovery seems to be underwhelming, especially our conference.
Speaker: The first day of our conference happened to be just following the April activity data release, which was a big miss.
Speaker: So people were asking what's going on.
Speaker: Does that mean the recovery?
Speaker: is pretty much down and now back to a relatively low growth rate.
Speaker: What do you think the answer to that question is?
Speaker: I mean, is this recovery going to continue to be underwhelming or have we perhaps not, has it not had enough chance to really get off the ground yet?
Speaker: I would say the recovery is still progressing.
Speaker: And just keep in mind, comparing to other countries, in particular the developed markets, it's fair to say the direct stimulus to the household, probably China is the lowest, because the philosophy is different.
Speaker: Chinese government wants to support the enterprises.
Speaker: and hopefully the effect can be filtered through.
Speaker: So from that perspective, it may not be so surprising that consumption doesn't have a very strong V-shaped recovery.
Speaker: I think it's fair to say when it comes to the service consumption, we do see that kind of instantaneous rebound.
Speaker: But when it comes to spending on different kinds of goods, probably we need to be a bit patient.
Speaker: Because we need the booming service sector to bring back jobs, the jobs will give the steady cash flow, and then the lower income group in particular will start to buy.
Speaker: Now you touched on stimulus there.
Speaker: I mean, at this point, that's something that I suspect a lot of Chinese people have come to expect at this point in an economic cycle.
Speaker: Has that been delivered?
Speaker: Is it being delivered at an ordinary pace or is it a little bit behind what we might have expected based on historical precedent?
Speaker: I think based on historical precedent, many people, not just Chinese people, I think particularly international long-term observers on China, would expect Chinese government already start to hand down different kind of stimulus, including monetary and fiscal.
Speaker: That's why lots of hope on maybe commodity prices will soar again because of the big infrastructure or housing push.
Speaker: But that's not the case this time.
Speaker: Obviously, the government wants to facilitate some structural change they have been talking about for a long time.
Speaker: For example, they might be more conservative in terms of launching mega infrastructure projects, especially the traditional ones.
Speaker: And they will be cautious in trying to push up the housing market rally again.
Speaker: In contrast, they would like to see more sustainable growth in sectors which they see potentially as a future growth engine.
Speaker: such as, you know, the advanced manufacturing and domestic consumption, so on and so forth.
Speaker: Probably not the most optimistic outlook that we could have on China at the moment.
Speaker: Growth coming in, I suppose, a little under what we might have expected and the same for stimulus.
Speaker: How does that shape your outlook for China for the rest of the year economically and beyond?
Speaker: Right.
Speaker: I think it's fair to say because of this structural change in mind, the government will be more cautious in handing down the stimulus.
Speaker: But that being said, when necessary, they still have plenty of policy room.
Speaker: So from that perspective, I would say in the near term, we still need to be patient when it comes to the economic recovery.
Speaker: It's still broadening out, but we're not, you know,
Speaker: peaking out yet, I would say.
Speaker: But in the longer term, if the structural change is done correctly, I will be more confident for the longer term outlook.
Speaker: Jing, always a pleasure to get your thoughts.
Speaker: Thank you very much for joining us.
Speaker: Thank you.
Speaker: So that's it from us.
Speaker: Thanks to our guests, Simon Wells, Ryan Wang and Jing Liu.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
